GERMANY Trends and Developments Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
rights. Such procedures may be flanked by general restrictions or caps with respect to moving (mate - rial) assets outside of the banking group (see also below). • Restrictions on affiliate and portfolio company transactions – Preventing transfers to entities con - nected to shareholders or group insiders unless on arm’s-length terms. • Careful consideration of future shareholder invest- ments – Mandating that additional capital injected by shareholders ranks behind, not ahead of, exist - ing holdco debt and thus preserving priority posi - tion of lenders. The success of these lender protections often depends on negotiation leverage. Investors are more likely to secure robust leakage controls when financ - ing stressed companies or refinancing legacy capital structures. When competing to fund high-performing businesses – as part of an initial buyout or a growth capital provision – issuers often resist overly restrictive terms, arguing for operational flexibility and sponsor latitude. Debt incurrence and anti-layering protections Beyond value leakage controls, lenders are keenly focused on minimising the emergence of new class - es of senior debt within the capital structure – a risk known as “layering”. Anti-layering protections are a cornerstone of holdco documentation, safeguarding creditors by regulating both the incurrence of new debt at the holding company level and upstream lay - ers in the group. The most common approaches to regulating the incurrence of new debt in the group usually include the introduction of incurrence-based tests, which will ultimately depend on the relevant leverage (debt to EBITDA) levels. When determining leverage, two refer - ence points generally prevail. • Attachment point leverage tests – Measuring only senior debt at the operating level, thereby grant - ing opco lenders more control over balance sheet capacity. • Detachment point leverage tests – Including both opco and holdco debt, which provides a holistic overview of risk but can restrict opco borrowing as
holdco PIK interest accretes. Over time, the result may be reduced flexibility to raise fresh operating company debt unless there is partial repayment, often through asset sales. In addition, holdco creditors typically push for restric - tions that prohibit the incurrence of significant liabili - ties at both the holdco and any intermediate entities. This approach limits the group’s ability to introduce additional creditors or new classes of senior financial claims without explicit investor consent. Robust anti- layering covenants are designed to reduce complexity in any future workout or restructuring. The fewer layers above the holdco debt, the greater the lender’s poten - tial influence – and the clearer their path to recovery. Negotiations on these points often balance the issuer’s desire to retain access to future, permitted financing – such as super priority rescue debt – with the creditor’s aim of excluding new classes from the restructuring dialogue. The final mix of permissions and restrictions reflects both commercial realities/necessities and the appetite for risk on each side. Investment and disposition controls Investment and asset sale regulations within holdco documents depend on the competitive dynamics and size of the deal. In broad market terms, larger leveraged transactions often exhibit more permissive investment and disposition language, on the theory that sophisticated opco finance documents and shareholder interests protect already against reckless asset disposal. Holdco investors may, however, require additional operational controls within their documentation. • Restrictions on acquisitions and asset dispos- als – Either through mirrored provisions from opco agreements or bespoke covenants addressing key business risks. • Alignment with shareholder interests – If appropri - ate leakage protections have been negotiated, investors may rely less on comprehensive invest - ment controls, trusting sponsors to act in their own interest to preserve asset value. Nonetheless, lend - ers may seek to regulate the disposition of “crown
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